April 19, 2024

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[THE INVESTOR] Following the passage of a tax hike bill on heat-not-burn tobacco products at a parliamentary committee, South Korean consumers are bracing for a price hike to begin as early as next month.

On Oct. 20, the strategy and finance committee of the National Assembly passed a proposal to raise individual consumption taxes on HNB products to 90 percent of the same tax levied on conventional cigarettes. If the bill passes the floor next month, each 20-stick pack of HNB sticks will be taxed to the tune of 529 won ($0.47), increased from the current 126 won, starting from December.

 

The IQOS system and HEETS sticks from Philip Morris. Philip Morris.

The tax for HNB tobacco could increase even higher, as there other bills awaiting at the National Assembly are also pending, such as the Health Promotion Fund tax.

Philip Morris International and British American Tobacco, the companies behind HNB tobacco systems IQOS and Glo, respectively, have hinted that prices on their tobacco sticks are highly likely to rise if taxes go up.

“Nothing is for certain, but if the higher taxes are passed it is unlikely that we will be able to continue in the Korean market at current prices,” said an official with one tobacco firm.

“Profitability is always going to be part of the mix when we decide consumer prices.”

HNB tobacco products are the latest tobacco product to hit the Korean market, following traditional burning cigarettes and e-cigarettes, which use nicotine-laced liquid rather than actual tobacco. With HNB systems, tobacco sticks are heated to produce vapor rather than being burned, potentially reducing the harmful health effects associated with smoking.

In addition to the purported reduced health risks, which are currently being studied by the Food and Drug Safety Ministry, HNB tobacco products offer other benefits, such as being nearly odorless. 

According to PMI, IQOS now composes about 2.5 percent of the Korean tobacco market. Previous figures put IQOS’ market share in Seoul alone at 5 percent.

It is uncertain how much PMI and BAT will be able to raise consumer prices in the fledgling market, especially as domestic manufacturer KT&G -- which already holds a majority market share in the combustible market -- prepares to launch its own HNB tobacco system called Lil next month.

The current price of HNB cigarettes is 4,300 won per pack, compared to the combustible cigarette price of 4,500 won per pack. Industry estimates say that new prices for HNB may rise to around 5,000 won per pack.

The government also announced it will be cracking down on potential hoarding of HNB sticks before a tax hike goes into effect. A similar hoarding phenomenon was seen before a 2,000 won price hike went into effect for combustible cigarettes in 2015.

Following months of discussion on a potential tax hike, IQOS and Glo smokers were seen stocking up on sticks, with some users even signing a petition to the president to block a tax hike. 

“At the moment, it seems that increasing taxes on IQOS is simply a ploy for the government to bring in more tax revenue by raising taxes on a growing market,” the petition reads. 

By Won Ho-jung/The Korea Herald (hjwon@heraldcorp.com)